Notification Coverage

The Ministry of Finance has notified an amendment in Prevention of Money-Laundering Act, 2002 (“Act”) by way of Notification No. S.O. 1072(E) dated 07.03.2023 (“Notification”).  The Act has been amended to include cryptocurrency or virtual digital assets (“VDA”) transactions within its scope. This means that certain transactions are now subject to the provisions of the Act.

The amendment shall be applicable to the following entities:

(a) exchange between virtual digital assets and fiat currencies;

(b) exchange between one or more forms of virtual digital assets;

(c) transfer of virtual digital assets;

(d) safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets; and

(e) participation in and provision of financial services related to an issuer’s offer and sale of a virtual digital asset.

If a company falls under the above mentioned categories they are considered to be Virtual Assets Service Providers (“VASPs”) and are required to follow various reporting requirements.

Reporting Requirements

1. Verifying Identity: Under section 11A of the Act, every reporting entity shall verify the identity of its clients and the beneficial owner, by: 
   • authentication under section 2(c) of the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016, if the reporting entity is a banking company;
   • offline verification under the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016;
   • use of passport issued under section 4 of the Passports Act, 1967; and
   • use of any other officially valid document or modes of identification as may be notified by the Central Government on this behalf.
2. Records Maintenance: Under section 12 of the Act,
   • Every reporting entity shall:
     • maintain a record of all transactions as to enable it to reconstruct individual transactions (for 5 years from the date of the transaction);
     • furnish to the Director, information relating to such transactions, whether attempted or executed, the nature and value of which may be prescribed; and
     • (iii) maintain record of documents evidencing identity of its clients and beneficial owners as well as account files and business correspondence relating to its clients (for 5 years after the business relationship between a client and the reporting entity has ended).
   • Every information maintained, furnished or verified, shall be kept confidential.

Conclusion

It can be therefore concluded that, the activities of any company who is just a marketplace or an aggregator of VDAs would not fall within the purview of this amendment. However, if a company engages in activities related to the buying and selling of VDAs, such as processing transactions, offering VDAs for sale, making purchase offers, or providing financial services related to them, it will be considered a reporting entity. In our view, advisory services or other non-financial services which do not include any actual facilitation of payments/ sale would not be covered under the ambit of the amendment. However, if a reporting entity engages in such activities, it must comply with the above mentioned requirements.

Disclaimer

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